The Pound declined against the Dollar for a fourth consecutive day, as gilts rose and equities dropped, whilst an industry report showed that financial services companies may lose as many as 15,000 jobs in the second quarter. UK stocks fell, sending the FTSE 100 Index to its biggest drop in four weeks, following reports that the U.S government said that some banks will need further government stimulus.
In addition, lower commodities prices weighed on mining and oil shares, while banking stocks also lost ground. Barclays Plc slumped 14% on the day, as Societe Generale SA said that the government could end up owning up to 67% of the struggling bank, as it recommended selling shares. The FTSE sank 3.5% yesterday, to record the biggest loss since March 2nd, but the gauge has still climbed 7.1% from the yearly low.
Banks from Barclays to Citigroup Inc said that they had a positive and profitable start to the year, while the U.S Treasury Secretary Timothy Geithner unveiled plans to rid struggling financial companies of toxic assets and bad debt. However, the recent drop in equity markets has encouraged investors to seek the security of Dollar denominated assets, as an element of risk aversion creeps back into the market.
According to David Fineberg, a senior trader at CMC Markets Plc in London, said yesterday that “the financials are struggling and crude oil prices are tumbling back towards $50 as the news acts as a stark reminder that there’s no quick fix to the economic malaise”.
The Pound slipped to its lowest level in nearly two-weeks against the majors, as we build up to the G-20 summit in London on April 2nd, where the leaders of advanced and emerging economies prepared to meet and discuss a global approach to financial regulation. Yesterday’s decline against the Dollar has put the Pound on course for its third straight quarterly loss, the longest stretch of declines since December 2005.
The UK currency may come under further selling pressure in the build-up to the summit, as Ian Stannard, senior currency strategist at BNP Paribas SA, said that “the increasing likelihood that we might not get anything significant out of the G-20 is going to weigh on equity markets and the Pound too. Sterling could well be the underperformer of the week.”
The Pound found support on dips towards 1.0700 versus the Euro, with a minor recovery towards 1.0800 overnight. Sterling also proved more resilient against the Dollar, after initial losses with a rally to $1.4260, from lows near $1.4110, amid a mixed day of UK economic data.
According to a report from the Confederation of British Industry, U.K financial services companies could cut as much as 1.4% of the industry’s workforce in the second quarter, as business confidence declines. The remaining UK economic data was mixed, as mortgage approvals actually rose to the highest level since May 2008, with a monthly increase to 38,000.
The report from the Bank of England showed that the number of UK loans approved far exceeded initial expectations and raised speculation that the slump in the housing sector may be reaching the bottom. A separate report from Hometrack Ltd showed that house prices fell at the slowest pace in 10-months, as the average cost of a home in Britain declined just 0.6% from February to £156,100.
The steepest economic contraction since 1980 has sapped demand for housing, amid rising unemployment and tighter lending conditions, after prices tripled in the decade ending 2007. Analysts some of the biggest financial institutions in the world have said this month that the property market may now be showing some signs of recovery, as government aid to bolster lending takes effect.
In addition, UK consumer confidence increased to the highest level since May, after the Bank of England slashed interest rates to a record low of 0.5%. The Gfk index of sentiment rose five points to a reading of minus 30 in March and the report increases some level of optimism in the UK economy, suggesting that lower rates are restoring confidence.
Elsewhere, the Pound stood relatively unchanged after reports that consumer lending and credit data remained weak, as consumers maintained a very cautious approach to borrowing and major banks also retained a restrictive policy towards lending. Government bonds also advanced, after the Bank of England bought £2.5 billion of gilts yesterday, as part of its quantitative easing policy to reduce borrowing costs.
EUR/USD
The diminishing appetite for risk pushed the Euro lower against the Dollar on Monday, falling to an intraday low of $1.3115, before a corrective recovery towards $1.3190, as significant technical support levels held steady. The single currency has continued to improve against the Dollar this morning, amid a revival in global stocks, but gains will be limited with markets on alert over ECB comments on Thursday.
In terms of economic data, the Euro was undermined following reports that European consumer confidence fell to the lowest level on record in March. The G-20 meeting in London this week will see finance ministers discuss the best way to fight the global recession, which has prompted job cuts across the Euro-zone.
An index of business and consumer sentiment in the Euro-region declined to a reading of 64.65, the lowest indicator since the series began in 1985, from 65.3 in February. Gauges for industry, services and consumer sentiment all reached record lows. While a separate report showed that Spanish consumer prices fell from a year earlier for the first time in history, indicating that deflationary pressures may spread.
The global financial crisis has pushed the Euro-zone economy into the worst recession since the Second World War, forcing companies to reduce output and shed their workforce. The European Central Bank are expected to cut interest rates by another 50 basis points on Thursday. However, the market will be watching the tone of the accompanying press conference for any clues that policy makers will engage in some method of quantitative easing policy.
Elsewhere, the Euro also came under further selling pressure, after the Purchasing Managers’ Index showed that European retail sales declined for a 10th consecutive months in March, as the deterioration in the labour market hampered spending. According to a report from JP Morgan & Chase Co, the single currency may extend its decline against the Dollar this week, should the Euro break below $1.3100.
Citing the current trading patterns, a level of $1.3097 represents a 50% retracement of the Euro’s rally against the Dollar, which began on March 4th. Referring to a percentage ratio that’s part of the Fibonacci sequence, a subsequent support of $1.3070 would represent the point before the Euro broke into a new range, after the Federal Reserve announced on March 18th that it will undertake the purchase of treasuries.
Following on from last week, the Pound was unable to sustain a recovery against the Dollar on Friday, dropping to a one-week low of $1.4270 in New York, after a government report showed that the UK economy sank deeper into a recession in the fourth quarter of last year.
The Pound was still firmer against the Euro, peaking close to the resistance level at 1.0810, before consolidating near 1.0750 at the close of trading on Friday, despite the report from the Office of National Statistics, which showed that UK gross domestic product fell 1.6% from the third quarter.
The UK economy’s contraction in the final three months of last year was far deeper than previously anticipated, as consumer spending stalled and industrial production plunged by the most since 1980. According to Philip Shaw, chief economist at Investec Securities in London, said that the “headline figure is very disappointing…we see the economy shrinking until the middle of the year. It’s very difficult to see it gaining any momentum of recovery until the third quarter at the earliest.”
The Pound came under further selling pressure against the majority of the 16-most actively trading currencies, after the Bank of England’s chief economist Spencer Dale said on Friday that the British economy’s short-term prospects are “bleak”.
Consumer spending has declined 1% and retail sales also stalled, after bank’s kept lending conditions retrained, despite the most aggressive policy easing in the Bank of England’s history. Policy makers, led by the governor Mervyn King, have slashed borrowing costs from 4.5% in October to a record low of 0.5%. The Bank have also begun a period of quantitative easing through the purchase of government and corporate bonds with newly created money.
Bank’s are still reluctant to revive lending and spending on the highstreet and on homes has plummeted, as the worst financial crisis since the Great Depression wiped out £1.9 trillion off consumers’ wealth. The Pound fell 0.6% against the Dollar after the release of the data, which confirmed that the UK economy is in the midst of the worst economic contraction since 1980, when Margaret Thatcher was Prime Minister.
The UK economy shrank 2% in the fourth quarter, compared to the preliminary estimates of 1.9%, as the drop in construction was more than four times as much as initial forecasts. In addition, government spending rose less than expected at 1.3% and retail sales posted the smallest annual gain in over 13-years last month.
The 1.9% drop in sales was exacerbated with the alarming increase in unemployment, as the jobless rate rose at the fastest pace since 1971 in February. Companies were forced to slash jobs in an attempt to reduce costs, while HSBC Holdings Plc, Europe’s biggest bank by market value, said last week that about 1,200 UK employees may lose their jobs.
The Prime Minister Gordon Brown, who has seen his popularity fade in the face of rising unemployment, said agreements that the government signed with the Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc require the banks to boost lending to help the economy recover.
Over the past week, Brown has embarked on a five-day diplomatic tour to try and raise interest in a combined attempt to boost global growth. He told journalists on Friday that “bank’s are now under an obligation to lend £50 billion. So the position that we were last year where the naming system had frozen, we are now seeing the results.”
Brown also quelled suggestions that he was planning a big new fiscal stimulus package, saying that measures in the UK’s annual budget next month will be “cautious” and “targeted”. The tone of the statement mirrored recent comments from the Chancellor of the Exchequer Alistair Darling, who said that the Treasury must keep its deficit under control, after the government bond auction failed for the first time since 2002.
The Pound also declined on Friday, after a separate report showed that the UK current account deficit was wider than previously anticipated in the fourth quarter. A current account gap represent money the UK has to borrow overseas to pay for the goods and service that it import. The shortfall narrowed to £7.6 billion, from a revised 8.2 billion in the previous quarter.
The downside momentum surrounding the Pound may continue this week, according to Marcus Hettinger, head of currency research at Credit Suisse Group AG. The Pound may drop towards 1.0520 against the Euro before the ECB interest rate announcement on Thursday. The UK currency also dropped 2.4% in value against the U.S Dollar and may trade between $1.3500 and $1.4000 over the next three months, as equity markets struggle to hold on to their gains.
UK stocks retreated on Friday, trimming the FTSE 100 Index’s third straight weekly advance, despite reports that Barclays Plc jumped 24%, after Britain’s third biggest bank said that it passed tests conducted by the UK’s financial regulator and may not need to raise additional capital.
EUR/USD
The Euro was unable to break above $1.3600 against the Dollar on Friday, weakening steadily through the course of the day. The single currency was undermined by comments from the German Finance Minister Steinbrueck, who said that the Euro would be put in jeopardy if there was fiscal irresponsibility.
The single currency was also unsettled by renewed speculation that the European Central Bank would follow the Federal Reserve and the Bank of England in engaging in some form of quantitative easing policy. European stocks also fell, ending a six day rally, as the degree of pessimism sweeping through the global economy reduced investors’ appetite for risk.
Reports in Germany showed that inflation slowed more than initial forecasts in March and to the weakest level in almost 10-years. Energy costs slumped and the steepest recession since the Second World War has curbed price pressures, threatening a period of deflation if consumer prices drop towards zero.
The inflation rate, calculated using the harmonised method of consumer prices, fell 0.4% from 1% in February, the lowest reading since June 1999. A 50% drop in crude oil prices over the past year has pushed the inflation down, just as companies are shedding jobs and business investment to cope with the economy slump.
The focus this week will inevitably fall on the ECB interest rate announcement on Thursday, and given the tone of recent rhetoric from a number of governing council members, the market is positioned for another 50 basis point reduction. That would leave the benchmark interest rate at a fresh historic low of just 1.0%.
The accompanying press conference will also be key in determining the short-term outlook for the Euro, amid growing speculation that the ECB will have little option but to engage in some form of quantitative easing policy. Any suggestions of move in this direction will undermine the Euro, which was already under pressure against the Dollar going into the weekend.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Failure to sell government gilts hits Sterling confidence
Euro trading 4c off record high
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.If you have any questions or comments about this Podcast please leave a comment below or call TorFX now on 0800 612 9625.
Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound attempted a limited recovery in early trading yesterday, with suspicions that selling from the previous day had been over-exaggerated, following the poorly-received gilt auction on Wednesday. However, the UK currency extended its losses against the Dollar yesterday, after a government report showed that retail sales plunged in February by more than four times faster than anticipated.
The report from the Office of National Statistics showed that sales dipped 1.9% from the previous month, the single biggest monthly decline since June, as unemployment rose and the recession deepened. Economists had predicted a 0.4% decline and sales increased just 0.4% from a year earlier, the smallest since September 1995.
The Chief Executive of Next Plc Simon Wolfson said yesterday that current trading conditions are “tough”, after the UK’s second biggest retailer reported a 15% drop in full-year profit. The deteriorating labour market conditions are expected to exacerbate the decline in consumer spending, while the bank’s refusal to revive lending conditions will continue to weigh on sales.
Earlier reports this week showed that UK inflation unexpectedly accelerated to 3.2% in February, driven by the cost of imports, and the Pound subsequently rallied, amid speculation that the increase in consumer prices will limit the risk of deflation.
Nevertheless, the Governor of the Bank of England Mervyn King said in an open letter to the government that the inflation rate will resume its drop from a high of 5.2% in September. The Bank has forecasted that the rate will slip towards 0.3% by early 2011, significantly below the bank’s 2.0% target.
King said this week that the UK economy fell deeper into a recession at the start of year, after the biggest contraction since 1980. The Central Bank has embarked on an asset insurance program to spend up to £150 billion to buy UK government debt, corporate bonds and other toxic assets with newly created money.
The Pound fell 0.4% against the Dollar in London, amid a combination of poor economic data and a third consecutive fall in the UK stock market. Sterling has continued that momentum this morning, falling to a low of $1.4320, as the data and downside moves in the stock market encourages investors to seek the security of dollar denominated assets.
The UK currency also slumped against the Euro, following the retail data, after earlier rising amid optimism that the worst of the financial turmoil may be over. The Debt Management Office, which manages bond auctions on behalf of the Treasury, sold £1.1 billion of inflation-linked bonds due 2022, with bids exceeding supply by 2.72 times.
The government amid to sell a record £146.4 billion of debt this fiscal year and roughly £148 billion in 2010, as the Prime Minister attempts to wrestle the UK economy out of its worst recession in a generation. The Chancellor Alistair Darling has signaled that he may refrain from holding a second round of fiscal stimulus measures in April 22nd budget, saying that “a substantial amount of money has gone into the economy.”
Gordon Brown is currently in the U.S, calling on the Group of 20 nations to raise $100 billion for a fund, aimed at providing guarantees for trade finance. The measure is designed to make up for the lack of bank lending, with world trade expected to decline at its fastest pace in 80-years.
The Pound may continue to struggle against the majors today but a narrow current account deficit should provide some relief. The UK currency may be unsettled by policy uncertainty, with particular concerns over the budget outlook as debt continues to expand at a rapid pace.
EUR/USD
The Euro pushed back above $1.3600 versus the Dollar yesterday, but the single currency was unable to sustain a move towards the resistance at $1.3650, as European stocks swung between gains and losses. The U.S economic data was close to initial estimates and failed to have any major effect of the exchange rate.
The latest estimates of U.S gross domestic product in the fourth quarter showed that the economy contracted at a rate of 6.3% in the three months to December, the worst performance since 1982. The reports indicates the depths of the recession, while a separate report from the Labour Department showed that the number of people claiming jobless benefits this month climbed to a record 5.56 million.
Data Released 27th March
U.K 09:30 Current Account (Q4)
U.K 09:30 Final Gross Domestic Product (Q4)
EU 10:00 Industrial Orders (January)
U.S 12:30 Personal Income / Consumption (February)
The Pound was on the defensive against the majors yesterday, amid a combination of economic and market fears, with lows around 1.0670 versus the Euro. While the UK currency also recorded net losses to around $1.4550 against the Dollar after the FTSE 100 Index dropped, as HSBC Holdings Plc said that will cut about 1,200 jobs in the UK, adding to signs that the recession is deepening.
The deteriorating labour market conditions has been a source of concern for the government, after Europe’s largest bank by market value, said that it will eliminate the jobs over the next 12-months in processing and operations, while some administration sites may be closed altogether.
The Pound also retreated from close to the highest level since December against the Japanese Yen, as a degree of risk aversion crept back into the market and encouraged investors to seek the security of safe haven currencies. The FTSE 100 Index of equities fell for a second day and the cost of protecting European corporate bonds from default rose.
The Pound declined up to 0.7% versus the U.S Dollar and extended losses against the Euro, after a report from the Confederation of British Industry showed that UK retail sales dropped in March. The survey showed a net 44% lower sales this month, as lending conditions remained restrained.
The UK CBI retail sales survey was weaker than anticipated and the report will provide an insight into the monthly retail sales data this morning and the data has been consistently stronger than expected over the past month.
The Bank of England have embarked on the post aggressive policy easing in its history, in an attempt to get banks lending again, lowering the benchmark lending rate to just 0.5%, from 5% in October. The Treasury has also granted the Central Bank the unprecedented power to create money and pump it into the economy through the purchase of government and corporate bonds.
Policy makers have been given the mandate to spend up to £150 billion, as part of it’s asset insurance program, in a bid to boost spending and end the worst recession in a generation. The governor of the BoE Mervyn King told lawmakers in Parliament yesterday that the “very weak” UK economy will continue to contract this quarter.
The Bank of England stepped up quantitative easing yesterday and bought £85.5 billion of corporate bonds in its first purchase of the debt. The Central Bank said in a statement that it had offered to buy as much as £124 million of debt and plans to hold another tender today for a maximum £128 million in company bonds.
The acquisition of company bonds follows the Bank of England’s purchases of commercial paper and government debt. The Bank will spend as much as £75 billion in newly created money within the next three months to boost the ailing economy. Elsewhere, a separate report showed that the UK bond auction failed to find enough buyers for £1.75 billion of bonds for the first time since 2002.
Gilts plunged after the Debt Management Office, which manages bond auctions of behalf of the Treasury, said that investors only bid for £1.63 billion of the 40-year securities. The last time the UK government was unable to attract enough investors was in 2002 when it tried to sell 30-year inflation-protected bonds.
The Pound will be at greater risk to selling pressure today if the retail sales report is significantly weaker than expected but the UK currency may also be susceptible to downside pressures, amid increased fears that the UK will not be able to attract sufficient overseas interest for bonds.
EUR/USD
The Euro weakened to lows around $1.3420 versus the Dollar yesterday, before rising sharply towards the close of trading last night, amid comments from China over the possibility of greater use of an alternative reserve currency. The issues of reserve currencies and exchange rate management were again important influences and the U.S Treasury Secretary Timothy Geithner stated that the administration was open to the idea.
Geithner’s comments initially weakened the Dollar but he retracted his remark, saying that the Dollar would remain the dominant reserve currency. The greenback will be sensitive to any further suggestion of reserve diversification, while evidence of a U.S economic improvement would lessen the risk that confidence in the Dollar would deteriorate.
The Euro initially declined against the Pound yesterday, after German business confidence fell to the lowest level in over 26-years in March. The report adds to signs that the recession is worsening and has heaped further pressure on the ECB to implement less conventional monetary tools. The Ifo Institute in Munich said its business climate index dropped to a reading of 82.1 from 82.6 in February, the worst reading since November 1982.
The global slump in overseas demand has forced German companies to scale back production and cut jobs, pushing the economy into the worst recession since the Second World War. The European Central Bank has signaled that it will cut interest rates again in April, but a number of policy makers have expressed reluctance to follow the Federal Reserve and Bank of England in engaging in quantitative easing measures.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
“Queasing” puts Sterling ahead of the game
News on the G20
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.If you have any questions or comments about this Podcast please leave a comment below or call TorFX now on 0800 612 9625.
Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound rallied to the highest level in over a month versus the U.S Dollar yesterday, as gilts plunged, following reports that UK inflation unexpectedly accelerated in February. According to the report from the Office of National Statistics, the annual pace of inflation rose in February, as consumer prices climbed 3.2%, amid higher food costs.
The weakness in Sterling also sustained pricing pressures, even as the economy drifted deeper into a recession. The surprising increase in the headline number was far higher than the 2.6% anticipated and the Bank of England Governor Mervyn King wrote in a letter to the Treasury that a “sharp decline” in the rate is likely to resume.
In a statement yesterday, King also said that a decline in the Pound “was very likely” and that “I see no reason why it should go any lower”. He also said that the Bank’s job is to respond and ensure the currency doesn’t keep inflation above the target, indicating that he is prepared to intervene accordingly.
The Chancellor Alistair Darling has been publicly supportive of King’s approach to medium term inflation expectations. Investors say consumer prices will be volatile given the drop in value of the Pound over the past year.
In addition, the monthly increase in consumer prices will temporarily ward off speculation that the UK economy is headed towards a period of deflation. The annual rate of inflation increased for the first time in five months, as prices for food and non-alcoholic drinks increased, boosted by gains in the cost of vegetables, after poor crops in Spain.
The data also reflected the effects of the exchange rate that pushed up the cost of imports. Ford Motor Co confirmed that the Pound’s “continued weakness” has forced the struggling automaker to increase the price of all its models in the U.K by an average of 3.75%, starting next month.
A separate gauge of the report showed that the retail price index, a measure of the cost of living used in pay bargaining, was unchanged from a year earlier, the weakest reading since March 1960.
The Bank of England has cut interest rates 4.5 percentage points since October, in the most aggressive policy easing in its history. The Central Bank announced last month that it has started printing money to fight the recession, while King told lawmakers yesterday that the outlook for consumer prices will determine how long that policy will last.
In addition, the BoE governor also said that the government should tread carefully on how much money it should pour into the UK economy and keep spending under control. Alistair Darling has said that he is considering further fiscal stimulus measures to bolster the economy in his annual budget statement on April 22nd.
In the pre-budget report last November, the Chancellor ordered £20 billion in tax cuts and spending increases, forecasting a deficit of 8% of gross domestic product. King has warned the government that it should not boost fiscal policy much further, given the significant increase in debt. The warning will tend to undermine support for the Pound, given that fiscal fears are already an important fact in undermining sentiment.
The Pound touched a high of $1.4779 versus the Dollar following the report, rising 1.4% by the close of trading last night, while the UK currency also peaked above 1.0800 against the Euro . The Pound also surged to the strongest level since December versus the Japanese Yen, as stocks in Europe and Asia gained, reducing the allure of safe haven currencies.
The U.S Treasury Secretary Timothy Geithner unveiled proposals to finance as much as $1 trillion in toxic assets. Stocks subsequently rallied as the move sparked a revival in risk appetite, while the drop in gilts pushed the 10-year yield up by the most in six weeks.
According to a report from CMC Markets Plc, the Pound may extend its rally to the highest level in six weeks versus the Dollar. The UK currency climbed above $1.44 last week and breached the 100-day moving average of $1.4700 yesterday, setting up to break through the next resistance level at $1.4880.
The renewed confidence in equity markets could see the Pound breach the $1.5000 barrier in the short-term, as the Dollar continues to depreciate, following the Federal Reserve’s decision to begin a period of quantitative easing.
In addition, a separate report from BNP Paribas SA has encouraged investors to buy the Pound, amid speculation that the government’s decision to pump money into the financial system will boost banking shares. The Bank of England confirmed yesterday that it purchased £7 billion of gilts in the week through March 19th with newly created money.
EUR/USD
The Euro was unable to sustain its upside momentum above the key resistance level at $1.3700 against the Dollar yesterday, amid a mixed tone of economic data and comments from ECB governing council members. Europe’s manufacturing and service industries contracted for a 10th straight month in March, as job cuts accelerated and companies reduced output.
The Purchasing Managers’ Index of both industries was at a reading of 37.6, compared with a record low of 36.2 in February. The measures of employment and output prices both fell towards record lows. Recent economic reports indicate that the Euro-zone economy is entrenched in the worst recession since the Second World War, as the global financial crisis curtails domestic and global demand.
Industrial production in the 16-nations sharing the Euro dropped by the most on record in January, while the unemployment increased to the highest level in over two years. The extent of the contraction in the Euro-zone economy has forced ECB policy makers to embark on the most aggressive policy easing in its 10-year history.
The governing council have however been reluctant to follow the Federal Reserve and the Bank of England and slash interest rates towards zero. The Euro has also found support as the ECB show few signs of engaging in quantitative easing measures, through creating money and pumping into the economy.
However, the single currency lost ground against Sterling yesterday, after ECB Vice President Lucas Papademos said that the Central Bank could consider embarking on quantitative easing measures, should all other options to revive the economy fail.
On being asked if the ECB would consider engaging in such measures, Papademos said, “this is an option which could be considered, in case the more traditional means for implementing monetary policy have been utilised”. He also noted that a “distinction should also be made between quantitative easing and credit easing”.
Policy makers have signaled that they would collectively favour expanding the bank’s existing credit-easing policy, of lending banks as much money as they require. Rather than following the Federal Reserve and Banking of England in printing money to buy government or corporate debt.
The Pound rallied to a one-month high versus the Dollar yesterday, as the UK currency continued to gain support from the overall improvement in risk appetite, with improved sentiment towards the banking sector also a key supportive factor.
The Pound peaked at $1.4650 versus its U.S counterpart, after UK stocks rallied for the third day in succession, led by banks, amid renewed optimism that the Federal Reserve’s plan to expand the financial rescue package will revive lending conditions.
The President of the United States Barack Obama and his administration are scheduled to announce the details of the plan to expand upon the $700 billion rescue package today. The U.S Treasury Secretary Timothy Geithner is set to unveil the plan that will partly rely upon private investors to buy ‘bad’ debt and refinance bank’s balance sheets.
Lloyds Banking Group Plc rallied 11% in London and Royal Banking of Scotland Group Plc rose 4.2%, as the U.S Treasury announced a plan aimed at injecting as much as $1 trillion in purchases of toxic assets. Barclays Bank Plc also surged 16% on the session, amid speculation that Hellman & Friedman LLC will bid for its ishares unit, along with a group of private equity firms.
The FTSE 100 Index rose a further 2.9% and the revival in risk appetite with continue to be supportive to Sterling in the near-term, as the UK currency also advanced against the Euro, rising to a high of 1.0776 over night.
However, Lauren Rosborough, a currency strategist at Westpac Banking Corp, said yesterday that “the market is somewhat short sterling and Britain’s currency may resume its decline against the Dollar in the medium term as the global economy deteriorates.”
The Pound declined heavily against all of the 16-most actively traded currencies, after the Bank of England announced last month that it will begin printing money and pumping it into the economy through a policy known as quantitative easing. UK bonds fell yesterday but further declines may be limited, as the BoE steps up the purchase of gilts in an attempt to revive the economy.
The Central Bank is expected to buy £2.5 billion of gilts today, after it bought £5 billion of bonds last week. The Pound stood firm yesterday and continued the upside momentum against the Dollar, despite comments from the outgoing Bank of England policy maker David Blanchflower.
Blanchflower, who voted for a rate cut at every meeting since October, reiterated his call for a government stimulus package to revive the UK economy, citing the risks that the number of people out of work and receiving jobless benefits will exceed 3 million later this year, as the recession deepens.
A recent report from the Office of National Statistics showed that UK unemployment rose by the most since records began in 1971 last month, as the UK economy sank into the worst contraction since 1980. The Prime Minister Gordon Brown has pumped hundreds of billion of Pounds in the financial sector, in a vain attempt the halt the decline, while policy makers have slashed borrowings costs to lowest level on record.
In a statement to Parliament, Blanchflower said that “forecasters in a recession tend to be overly optimistic” and “the worry is that any forecast we do have of unemployment or output, the likelihood in a recession is that we’ve undercooked”.
His comments yesterday are in stark contrast to a statement released by the Confederation of British Industry, who said that the government should avoid a further budget giveaway because the public finances are in an “alarming state”.
The focus today will fall on the tone of the comments from the Bank of England governor Mervyn King, for further evidence on the economic trends and a pessimistic tone would risk renewed selling pressure on the Pound. In terms of economic data, a weak report this morning on UK consumer prices could also increase concerns over deflation. The retail price index is likely to dip to significantly below zero but the Pound will gain support is global stock markets continue to gain.
EUR/USD
The Euro is fast-becoming the currency of choice for investors, after the Fed’s actions last week devalued the Dollar and caused a revival in risk appetite. The European Central Bank President Jean-Claude Trichet has been widely criticised for failing to keep up with efforts to stem the recession.
However, the ECB’s reluctance to use less conventional tools to revive the economy, while the Federal Reserve and the Bank of England undertake quantitative easing measures, means that traders are now glad that the Central Bank are behind the curve and have bought the Euro as an element of risk appetite returns.
Trichet suggested that there was further scope to cut interest rates next month, but also expressed doubts over the potential to cut rates to zero. In the statement yesterday, he also indicated that there will be resistance to utilise any further non-conventional measures.
The single currency has strengthened 7.7% in value against the Dollar this month, after tumbling 9.3% in the first two months of the year. JP Morgan & Chase Co, Morgan Stanley and Citigroup Inc are all advising investors to step up their purchase of Euros.
Investors are ignoring reports from the European Union that the economy will contract 3.3% this year, and are snapping up currencies where Central Bankers are resisting calls to purchase government or corporate debt, as a way of lowering interest rates and pump money into their financial systems. These options are becoming increasingly scarce after the Federal Reserve joined the Bank of England, Bank of Japan and Swiss National Bank in quantitative easing.
John Normand, Head of currency strategy at JP Morgan in London, said that the Euro will probably rise 2.8% against the Dollar to $1.4000 in a month, after soaring 5.1% in value over the past week. “the top on Euro-Dollar will come when the ECB looks likely to join the quantitative easing crowd”.
The Dollar found little support against the majors yesterday, as a rebound in global stocks diminished the allure of safe haven currencies. The U.S currency also failed to make gains, despite reports that existing home sales unexpectedly climbed in February, as a record number of foreclosures encouraged buyers into the market to take advantage of lower prices.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Euro still strong with no plans for quantitative easing
Sterling makes large gains on the US Dollar
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Following on from last week, the Pound recorded its biggest weekly advance against the Dollar in seven weeks, after the U.S Federal Reserve announced that it would undertake quantitative easing measures and start printing money to buy Treasuries.
The Fed’s decision to utilise less conventional techniques to revive the economy is undermining Dollar sentiment, while the Bank of England also confirmed that it would purchase corporate debt to bolster financial markets.
The introduction of quantitative easing measures through excessive money supply threatens to de-value the Dollar, as the greenback suck towards $1.3700 versus the Euro and $1.4500 against the Pound, the weakest level since January 29th.
The Dollar crumbled against the majors last night in the aftermath of the FOMC statement, as the Fed announced that it will start buying Treasuries and increase its purchase of mortgage debt. Federal Reserve policy makers said that they will buy as much as $300 billion of U.S government bonds and step up the purchase of mortgage-backed securities, expanding the Bank’s balance sheet by up to $1.15 trillion.
According to currency strategists at Citigroup Inc, “the implications of the Fed decision are unambiguous, the Dollar should weaken”. The U.S currency may continue the downside momentum in the near-term and has lost over 3% in value versus the Pound, as investors are encouraged to sell out of Dollar denominated assets.
The Pound held close to the highest level in a month against the Dollar on Friday, after the newly appointed member of the Bank of England’s monetary policy committee, Spencer Dale, said that the UK economy will begin growing in the second half of the year.
According to the minutes from the Bank’s last policy-setting meeting, UK policy makers voted unanimously to start printing £75 billion to pump into the financial sector and fight the recession. The nine-strong committee also cut the benchmark interest rate to an historic low of 0.5%. The Chancellor of the Exchequer Alistair Darling gave the Central Bank the go ahead to buy up to £150 billion to cleanse UK banks of toxic assets.
According to a report from BNP Paribas SA, the Pound will also be supported by a rally in banking shares, as the measures announced last week have a global effect and increase confidence. “We view the quantitative easing introduced in the UK and then adopted in Switzerland and the U.S as Pound bullish”.
UK stocks gained on Friday, extending the FTSE 100 Index’s second consecutive weekly advance, led by an increase in banking stocks. The index increased 2.4% on the week, after the Federal Reserve’s announcement and investors are speculating on whether we are entering a “bottoming process for equities.”
The Pound stood firm and managed to cling to recent gains made against the majors, despite reports that UK house prices face a decline of 40% in nominal terms, as the most aggressive policy easing in history fails to revive lending conditions.
According to the report from Sanford C. Bernstein, prices have already slipped 20% in the past year but property crashes in the past were largely masked by the effects of inflation. “The key difference this time is that more of the drop in the income ratio actually hits nominal prices” since inflation is now lower.
UK housing sales have slumped to the lowest level since records began in 1978, as the deepening recession pushed down prices. The report from the Chartered Institution of Chartered Surveyors also showed that the UK economy suffered the worst contraction since 1980, in the final three months of 2008.
Elsewhere, the Prime Minister Gordon Brown has come under further pressure as unemployment rise to the highest level in a decade. An independent report from the National Audit Office increase his woes, as it said that the government allowed Northern Rock Plc to keep writing risky loans, even after the lender sought emergency funding from the Treasury.
The auditor also found that the Treasury failed to adequately examine the bank’s books before they took it over in February last year, allowing the lender to pursue a flawed business plan that resulted in a £1.4 billion loss.
The focus this week will fall on whether the Pound can sustain last week’s gain, while comments from the Bank of England governor Mervyn King will be watched closely for further evidence on the economic trends and bank policies.
A pessimistic tone will risk renewed selling pressure on the Pound and a number of key economic indicators are due for the release. The CPI index will probably reveal that the annual pace of inflation moderated in February, while UK retail sales probably fell a further 0.4% on the month, amid tighter lending conditions and fears over job security.
EUR/USD
The Euro again met resistance above the $1.3700 level versus the Dollar, and remained largely resilient against a resurgent Pound, as ECB policy makers resist giving any indication of implementing less conventional techniques to revive the economy.
ECB governing council member Nout Wellink said that the Central Bank may cut interest rates again in March, as consumer prices continue to fall and encourage spending. The ECB have lowered interest rates by 2.75 percentage points since October, to a record low of 1.5%, in a seemingly vain attempt to halt the worst recession since the Second World War.
The Bank of England, the Federal Reserve and the Bank of Japan have all gone further, cutting their benchmark interest rates to close to zero and have confirmed that they will buy government bonds to stimulate their economies.
Wellink confirmed that “at this moment we don’t foresee that process” and the ECB’s reluctance to undertake such measures will be supportive to the Euro in the near term. Inflation was at 1.2% in February, close to the lowest level since 1999. The Central Bank aims to keep the rate jut below 2.0% but has forecasted that prices will plunge to 0.4% this year, threatening a period of deflation, as the economy contracts 2.7%.
In addition, ECB member and Bundesbank President Axel Weber said that the Bank will lower interest rates again and may extend the maturities of its loans to banks, pushing down long-term borrowing costs.
In a speech in Berlin, Weber confirmed that the ECB still has “room to maneuver” and suggested that he favours expanding the Central Bank’s existing policy of lending, rather than following the U.S Federal Reserve and Bank of England in buying government or corporate debt.
In terms of economic data, the Euro stood firm despite reports that European industrial production shrank by the most on record in January, as the steepest global recession in over sixty years forced companies to cut output and curb investments.
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